Chapter 0: Actuarial Control Cycle

Question 1

What makes the ACC “actuarial”?

Answer 1

The ACC incorporates the following basic elements, which are common to all actuarial and risk management work:

• The estimation of the financial impact of uncertain future events
• A long-term rather than a short term time horizon, but decisions to be made in the short term in the light of likely future outcomes
• consideration of stakeholders’ requirements and risk appetite
• The need to allow for the general business environment (legislation. regulation, tax and competition)
• The use of assumptions based on appropriate historical experience
• Monitoring and periodically analyzing the emerging experience in order to update models and strategies in light of the emerging experience
• The application of professional judgement

Question 2

Specifying the problem

Answer 2

• Setting out clearly the problem from the viewpoint of each stakeholder
• Assessing and analyzing the risks for each stakeholder
• Considering the strategic courses of action available to manage, mitigate or transfer the particular risks in question
• Analyzing the options for the design of solutions to the problem that transfer risk from one set of stakeholders to another

Question 3

Monitoring the experience

Answer 3

• Analyzing periodically the actual experience against expected
• Identifying causes of departure from expected experience and determining whether each source is one-off or likely to recur
• Feeding back into the specifying the problem and developing the solution stages of the ACC
• Making sure the model is ‘dynamic’ (i.e. assumptions are consistent) and reflects current experience

THE MONITORING OF NEW CONTRACTS OR NEW ELEMENTS OF CONTRACTS SHOULD OCCUR MORE FREQUENTLY.

Question 4

List 10 applications of the ACC in actuarial work

Answer 4

• Asset-liability management (e.g. setting investment strategy)
• Monitoring the effects of investment mismatching
• Considering insurance and reinsurance options
• Determining the profitability of the contract
• Considering the need for and calculation of provisions
• Determining the (current and future) solvency levels
• Assessing capital requirements
• Determining premiums / contributions
• Assumption setting for contract / scheme design

Question 5

Outline why the ACC is suitable for use in risk management

Answer 5

Risk management also involves the following cyclical process:

• analyzing situations, products and projects to determine the risks to which they are exposed
• quantifying the financial consequences of the risk events occurring
• considering and quantifying appropriate methods for managing, mitigating and transferring the risks
• monitoring the situation and the risk management procedures implemented as time develops
• modifying or changing the risk management approaches adopted over time, in light of emerging experience

Question 6

Key Topics Under the General Commercial and Economic Environment

Answer 6

ESPERIA, a magical environment far away

• External environment
• Stakeholders
• Providers of benefits
• Economic Influences
• Regulation
• Insurance products
• Asset Classes

The context will depend on the field in which the actuary is working

See page 7 for examples

Question 7

Key topics in developing the solution

Answer 7

• Selecting Appropriate Actuarial Models
• Appropriate Assumptions
• Implications for all Stakeholders
• Determine a Proposed Solution and Alternatives

Question 8

Developing the solution

Answer 8

MODEL CONSTRUCTION
- An examination of the major actuarial models currently in use and how they may be adjusted for the
particular problem to be solved
- Selection of the most appropriate model to use for the problem, or construction of a new model
- Consideration and selection of the assumptions to be used in the model.

MODEL RESULTS
- Interpretation of the results of the modelling process
- Consideration of the implications of the model results
on the overall problem.
- Consideration of the implications of the results for all
stakeholders

SOLUTION

• determining a proposed solution to the problem
• consideration of alternative solutions and their effects on the problem
• formalising a proposal
• communicating the proposed solution and the alternatives

Question 9

Investment risk

Answer 9

The uncertainty associated with the outcome of making an investment

Question 10

Credit risk

Answer 10

The risk that a person or an organisation will fail to make a payment that they have promised

Question 11

Market risk

Answer 11

Risks related to changes in investment market values

Question 12

Inflation risk

Answer 12

Risk of real liabilities being larger than anticipated due to inflation.

Question 13

Underwriting risk

Answer 13

Risk of failures in underwriting leading the insurer to take on risks at an inadequate price

Question 14

Insurance risk

Answer 14

Risk of more claims being made than expected

Question 15

Exposure risk

Answer 15

Risk of more claims arising from a particular event due to the insurer having greater exposure to a particular peril than had been appreciated.
Might be due to inadequate diversification within the portfolio of business written

Question 16

Finance risk

Answer 16

Risk of not being able to obtain finance when required or not being able to obtain it at the anticipated cost.

Question 17

Possible solutions to mitigate risks

Answer 17

• avoiding
• accepting and minimizing
• sharing
• transferring risk together with ongoing monitoring.